Although tax season has ended, taxes still are a topic heavily discussed due to a law passed in December.
The federal tax overhaul that was signed into law by President Donald Trump is a sweeping reform of the U.S. tax code. Many of the changes affect employees.
The immediate impact of the new tax law is the tax rate. Employees across the country are seeing a lower income tax rate, according to Daniel Harris, manager at Grand Rapids-based Hungerford Nichols CPAs and Advisors.
“Middle-class taxpayers in recent years have tended to have much of their (income) taxed at 15 percent and 25 percent rates,” Harris said. “Starting in 2018, they will mostly pay tax at 12 percent and 22 percent rates. These changes have already been incorporated into tax withholding tables, so most employees should have already seen increases in their regular paychecks due to decreases in tax withholdings.”
In addition to changes made in the income tax rate, there are many employee benefits that either were taken away, altered or have remained the same in the tax overhaul.
Part of the Affordable Care Act’s individual mandate was repealed. Philip Routzahn, employee benefits administrator at insurance agency Doyle & Ogden in Grand Rapids, said beginning in 2019, employees without health insurance will no longer be penalized.
“While there may be a few employees who will decide to waive their health benefits, this is not expected to have an effect on employers,” Routzahn said. “In 2019, it is estimated that 4 million people will be uninsured and potentially 13 million will be uninsured in 2027.”
Employers can no longer exclude moving expenses reimbursement for their employees’ income. Harris said employees receive their reimbursement in their income through their W-2s, where the wage income would increase. The same rule applies to employees who commute to work on their bicycle.
Routzahn said expenses such as parking passes, entertainment and recreational benefits, meals, food and beverages will no longer be deductible for employers.
There also is a new tax credit for employer-paid family and medical leaves.
“This tax credit goes to the employer rather than the employee, but it can be fairly lucrative because if a company pays an employee on leave 100 percent of their normal wages, then the company receives a tax credit for 25 percent of the wages. Thus, if an employer fully pays $10,000 to an employee on leave, then the employer gets a tax credit of $2,500.”
However, Harris said there are two catches. The tax credit currently is only available for the 2018 and 2019 tax years, and the employer has to have a provision for paid leave that is separate from regular vacation and sick pay, he said.
“They can’t just say, ‘We are already generous to our workers with vacation and sick time so we should get a credit,’” Harris said.
Although tax deduction for achievement awards given to employees for their service is not completely eliminated, Harris said the scope of the awards is limited.
Prior to the new tax law, employers could award employees items that were valued up to $400 and the employers could claim them as deductibles and not taxable to the employees.
“What the new tax law does is tighten the definition of what a company can pay an employee and exclude that from their income,” Harris said. “For an employee to qualify and exclude valued items from their income, it cannot be cash equivalents like gift cards, gift coupons, vacations, meals, lodging, sports tickets, stocks or bonds.
“So it is pretty limited in what you can do. I would say tangible gifts, like watches, jewelry or clothing (are eligible prizes).”
Another employee benefit that was affected was 401(k) loans.
According to Routzahn, prior to the new tax law being signed, if a 401(k) plan was to be terminated or the participant ended employment, any outstanding 401(k) loans repayment would be accelerated.
If it was not paid in a timely fashion, the participant account would be offset by the loan amount due. The loan must roll over to another qualified plan or IRA within 60 days of the offset, if a caveat is permissible under the plan terms, according to Routzahn.
However, Routzahn said the new law now allows for an extension for a loan-offset rollover period — until the due date for the federal tax return filings — as opposed to the limit of 60 days.
Although many employee benefits have changed since the year before, some have remained unchanged.
“As far as what is not changing — dependent care, flexible spending accounts, tuition reduction, adoption assistance, education assistance, health saving accounts, health flexible spending accounts — those remain a tax-free benefit to employees and a deductible to employers,” Routzahn said.